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Oct. 3 — France's patent box legislation, which permits a 15 percent corporate tax rate for
profits from licensing of intellectual property rights rather than the usual 35 percent
corporate tax rate, is being challenged as unfair to the European Union single market.

The matter has come before the EU Code of Conduct Group for Business Taxation, where
several EU countries—including Ireland, Bulgaria and the Baltic nations—
are insisting the French patent box regime should be considered harmful.

Among those contesting France's IP rate are EU member countries that were themselves
previously criticized by France over their overall low corporate tax rates.

“The issue has surfaced because France insists its regime doesn't need to be reformed
as all EU member states agreed to do in 2014,” a European Union diplomat, who participates
in the Code of Conduct Group of Business Taxation, told Bloomberg BNA Sept. 30.

“However, all other EU countries are reforming their tax regime and insist France
must do the same. Some of these countries, many of them resentful over French criticism
of tax dumping, are rejecting the French arguments against reform.”

French Defense

France defended its patent box law at a meeting of the conduct group Sept. 23, insisting
the reduced tax rate of 15 percent shouldn't be considered harmful in light of the
varying level of corporate tax rates among other EU member countries, and because
the scheme hasn't attracted foreign investment.

In a document submitted to the Conduct group and seen by Bloomberg BNA, the French
government said: “Even if this rate is lower than half the French general tax rate,
it can not be a relevant feature to consider an IP regime as potentially harmful.
Levels of corporate tax have been substantially reduced since then in many EU countries.
Given this, the French IP regime tax rate of 15 percent can not affect in a significant
way the location of business activities.”

France also insisted in the document that “136 taxpayers benefit from the regime.”

“The total expenditure of the IP regime is estimated to be 245 million euro ($274.4)
in 2014. Specifically, it is a fact that mainly French companies benefit from this
regime. The data shows that the regime is not attractive to foreign companies.

“They do not tend to locate their patent activity in France,” the French government
stated, adding that this is a “robust” indication that the French IP regime has no
harmful effect.

European Green Party Pressure

The challenge to the French IP regime comes as the European Green Party and other
political groups in the European Parliament are pressuring the European Commission
to come to a decision over the regulation of patent box regimes. Currently, 12 EU
member countries have patent box tax regimes.

EU finance ministers agreed in 2014 that all EU patent box regimes must be reformed
to comply with the modified nexus regime after the commission threatened to challenge
some of the schemes with an illegal state aid probe.

The Organization for Economic Cooperation and Development's base erosion and profiting
shifting reforms also call for compliance with the modified nexus approach.

“It has been brought to our attention that several countries are delayed in the implementation
of the modified nexus approach,” said the European Green Party in a letter, a copy
of which was seen by Bloomberg BNA.

“Furthermore, despite a general commitment in 2014 to do so, France now claims that
it will not rollback its patent box scheme.”

Patent Box Regimes Under Scrutiny

A European Commission official told Bloomberg BNA that it is still assessing whether
the 12 EU member countries with patent box regimes are adapting sufficient reforms
to comply with the modified nexus approach, which basically only allows a nation to
adopt tax reductions on profits generated from patents derived from research and development
that occurred within the country. Many countries have adopted patent boxes in an effort
to attract high-tech enterprises.

“There has been progress, so at this point we are optimistic that by 2019, sufficient
changes will have been adopted,” the European Commission official told Bloomberg BNA
Sept. 30 on condition of anonymity.

Race to the Bottom?

The debate over the French patent box tax plan has triggered varying viewpoints among
lawyers and experts.

“The patent box regime by France is another example of an incentive to race to the
bottom in corporate tax rates,” Tommaso Faccio, a professor of tax law at the University
of Nottingham, told Bloomberg BNA Sept. 30 in an e-mail statement.

“It is hypocritical of France to introduce it after having complained for years about
unfair tax competition.”

Romain Pichot, a tax lawyer based in Paris, told Bloomberg BNA the French patent box
regime was “defensive.”

“It does not help to attract non-French based companies but it helps to retain certain
French-based companies in France,” Picton told Bloomberg BNA in an Sept. 29 email
statement. “It should be viewed as a tool to retain research and development in France.
”

He added that it was unfair for other member states to criticize the French regime
over the reduced corporate tax regime because many of them have “built their economy
on tax competition with their neighbor.”

The Code of Conduct Group is expected to revisit the mater in November.

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